Owner (K-1 partnership) -occ. refi, depreciation and debt/income

[Christoph Berendes]

My wife and I own a 3 unit apartment building as a partnership, shown on K-1 returns. We have lived in the top unit (#3) and rented out #1 and #2 for about 20 years. We'd like to refinance. (Note that the numbers below are fictitious, but resemble our situation. My question regards how the lender is calculating income in the debt-to-income ratio based on the existence of the partnership.)

If we treat the partnership as a standard business, our DTI is unfavorable:

• Net rental income: $7600
• Other income:        $3000
• Total:                   $10600
• Debt:                    $ 6000
• DTI: 57%

A DTI of 57% is above their limit.

However, since Net Rental Income excludes $1000 monthly depreciation (non-cash expense) and $2,400 interest expense (part of the proposed debt), we were initially told that they would add back depreciation and interest expense, leading to a monthly income of $14,000, and a debt-to-income ratio of 43%, and that DTI would pass muster.

The loan went to underwriting on that basis, but underwriting decided that they couldn't add back depreciation and interest expense, since it's a K-1. (They could, apparently, if we took the income on a schedule E, without a partnership.) So they've declined the loan.

The lender - Chase - says this is per federal guidelines. What other options should we consider?

Thanks.